Cost basis of reinvested dividends with service fee/commission

Michael Farley
Michael Farley Member ✭✭✭
edited July 2021 in Investing (Windows)
Should a service fee be included in the cost basis of reinvested dividends? I noticed a cost basis difference between Quicken and the Morgan Stanley statement. MS takes the service fee out of the dividend, then the cost basis is the reduced amount/shares.

In Quicken, I had put the gross dividend amount in with a negative commission. The cost basis is slightly higher than MS.

To match MS, I would have to enter a Div, then MiscExp with the service fee, then do the reinvest of the remaining dividend.

Comments? What does the IRS say? I did not see an exact match to my question in the Community.

Comments

  • Mark1104
    Mark1104 Member ✭✭✭✭
    let's use numbers so we are all clear.

    I have a $1000 dividend and at the same time a service fee of $200. The dividend is reinvested

    Assuming we are talking about a non-qual account, there is reportable income of $1000  to the IRS - whether it is reinvested or not.

    The $200 fee is an expense and under current tax law is not deductible on your tax return. 

    Since one item is taxable and the other is not, they can not be netted together.  

    If MS is netting the $200 from the $1000 before reinvesting, then the cost basis is increased by $800, but the income to be reported to the IRS is still $1,000.  THey have to get the cash from somewhere to pay the $200 fee.  

    Looking at it another way, the $1000 is reinvested ("Buy"), creating X additional shares. And then a 2nd transaction occurs ("Sold") to raise $200 of cash to pay for the fees which reduces the number of shares. 

    MS has it correct. 

    make sense?  
  • Tom Young
    Tom Young SuperUser ✭✭✭✭✭
    The issue of fees associated with reinvested dividends has been mentioned in here several times before.  If you want both accurate income numbers and accurate cost basis you'll have to do some extra accounting for each reinvested dividend.
  • Rocket J Squirrel
    Rocket J Squirrel SuperUser ✭✭✭✭✭
    edited July 2021
    Commissions and fees are explicitly added to the cost basis of securities.
    IRS Publication 551:
    The basis of stocks or bonds you buy is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees.

    Quicken can handle this in the "Reinvest" action of investment accounts. Just input the commission as well as the amount reinvested and shares received.
    Quicken user since version 2 for DOS, now using QWin Premier Subscription on Win10 Pro.
  • Mark1104
    Mark1104 Member ✭✭✭✭
    @Rocket J Squirrel- note the question was about 'service fees', not commission, recording or transfer fees.  In essence, MS appears to be purchasing shares to reflect the dividend reinvestment and then selling shares to raise cash to pay for the service fees (i.e. "management fee"). 
  • Chris_QPW
    Chris_QPW Member ✭✭✭✭
    Frankly I'm no expert on this, but there is one thing I know for sure, if the financial institution reports it one way (which goes to the IRS too) for you to do it differently would require convincing them they are wrong and to change it.  Not likely going to happen.

    So I would record it how they did.
    Signature:
    (I'm always using the latest Quicken Windows Premier subscription version)
    This is my website: http://www.quicknperlwiz.com/
  • NotACPA
    NotACPA SuperUser ✭✭✭✭✭
    If Morgan Stanley is charging you a "Service Fee" to reinvest dividends ... dump MS and switch to Vanguard or Fidelity ... which don't charge for this action.
    Q user since DOS version 5
    Now running Quicken Windows Subscription, Home & Business
    Retired "Certified Information Systems Auditor" & Bank Audit VP
  • Roger Miller
    Roger Miller Member ✭✭✭
    > @NotACPA said:
    > If Morgan Stanley is charging you a "Service Fee" to reinvest dividends ... dump MS and switch to Vanguard or Fidelity ... which don't charge for this action.

    Or E*Trade
    QWin Premier user since 1997. QWin Premier subscription on Windows 10 & 11. I don't use mobile & web or bill pay.

  • q_lurker
    q_lurker SuperUser ✭✭✭✭✭
    Commissions and fees are explicitly added to the cost basis of securities.
    IRS Publication 551:
    The basis of stocks or bonds you buy is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees.

    Quicken can handle this in the "Reinvest" action of investment accounts. Just input the commission as well as the amount reinvested and shares received.
    I have a negative opinion about commissions on the ReinvDiv entries.  I find that is you enter a ReinvDiv transaction with correct total dividend and share quantity and with a positive commission in the field, you get
    • A security lot with correct number of shares and cost basis (= total dividend)
    • A dividend record (not a specific transaction) for that total dividend for various report purposes
    but Quicken also generates
    • A MiscIncX transaction as an additional Div received (category = _DivInc).  The 'X' factor assigns the transfer to the same brokerage account such that the cash balance of the account is not impacted.   
    This results in the dividends for the security being overstated.  

    In my opinion, that MiscIncX transaction should be deleted, or the commission should not be entered in the first place (such that the MiscIncX is then not generated).

    @Michael Farley -- In your original question title, you used commission and service fees interchangeably.  I suggest you take up the issue with the brokerage as to whether such fees are attributable to the purchase of the securities (thus part of the cost basis).  While they may be reluctant to offer 'tax advice', they should be able to justify their determination of cost basis.

    If as others have suggested and MS has indicated these service fees are something else, then my approach in Quicken would be a separation of the transactions -- Div, MiscExp, and Buy shares.  An alternate would be ReinvDiv (Issued shares with the basis of those shares), and then Div and MiscExp transactions for the service fees.           
  • Rocket J Squirrel
    Rocket J Squirrel SuperUser ✭✭✭✭✭
    q_lurker said:
     I find that is you enter a ReinvDiv transaction with correct total dividend and share quantity and with a positive commission in the field, you get
    • A security lot with correct number of shares and cost basis (= total dividend)
    • A dividend record (not a specific transaction) for that total dividend for various report purposes
    but Quicken also generates
    • A MiscIncX transaction as an additional Div received (category = _DivInc).  The 'X' factor assigns the transfer to the same brokerage account such that the cash balance of the account is not impacted.   
    This results in the dividends for the security being overstated.  

    In my opinion, that MiscIncX transaction should be deleted, or the commission should not be entered in the first place (such that the MiscIncX is then not generated).
    Unfortunately, @q_lurker, you are correct. This is strange and, dare I say, buggy behavior. You have to keep your eye on Quicken all the time lest it screw up in some random fashion like this.
    The thing is, that commission or fee almost certainly contributes to the security's basis, so that has to be accounted for unless this is a tax-advantaged account.
    Quicken user since version 2 for DOS, now using QWin Premier Subscription on Win10 Pro.
  • q_lurker
    q_lurker SuperUser ✭✭✭✭✭
    Rocket J Squirrel said:
    The thing is, that commission or fee almost certainly contributes to the security's basis, so that has to be accounted for unless this is a tax-advantaged account.
    That too is 'the thing'.  Quicken gets the right cost basis assigned to the shares (i.e. total dividend that was entered).  The fee "contributes" because you end up buying fewer shares than is there were no commission, 

    Say the dividend is $1000, the price/share is $9.  With no commission, you would have bought 111.111 shares and the basis would have been $1000.  Those have a basis of $9/share.  Quicken gets that right.

    With a $10 commission, there is only $990 left to buy shares, you end up buying 110 shares at $9/share plus the $10 commission.  Your total basis is the same $1000 ($990 + 10), but your basis/share is $9.0909. Quicken gets that right, too.  But then they add in that MiscIncX transaction to try to unnecessarily account for the $10 commission and the total dividend is now off by the $10.   

    And all that is independent of tax-advantaged account or not.  While Cost Basis is necessary for taxation concerns, the same cost basis definition and calculation applies in Quicken without regard to the tax status of the account.

    Now back to your regularly scheduled discussion as we seem to have ventured off topic.  
This discussion has been closed.